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Sales Tax on Ohio Leases - Accelerated Payment & Sourcing

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What's an easy and politically viable way to increase sales tax revenues without raising taxes or eliminating tax exemptions? Answer: Make the tax due earlier. That's what Ohio did way back in 2002. Before 2002, tax on leased goods was due as the lease payments were made. Thus, sales tax revenue on a five year lease would be collected over five years. Starting in 2002, tax on most long-term leases became due when the lease is executed.

As the chart below shows, generally speaking, sales tax on leases with a term greater than 30 days is due when the lease is executed. In all other instances, sales tax is due as the payments are made.

The taxes due equal the sum of the lease payments, including any down payments or trade-ins, multiplied by the applicable sales tax rate. (One exception: the trade-in value of a used motor vehicle, boat, or outboard motor for a new one is not included in the taxable price.) In most instances, the leasing company will finance the lump sum tax payment. This portion of the lease payment should be excluded when calculating the tax due.

Leases - Tax Due When Lease Executed *

Property Lease Term Sourcing
Motor Vehicles (Carrying load less than 1 ton) Greater than 30 days The vehicle's primary location when the lease is executed. R.C. 5739.033(I)(2)(a)(i). "Primary location" means an address provided by the lessee. R.C. 5739.033(I)(3). Tax Department Alert** - Source to the lessee's county of residence or business location. Tax on additional charges are sourced to the property's primary location during the lease.
Boats & Outboard Motors Greater than 30 days The boat's or motor's primary location when the lease is executed. R.C. 5739.033(I)(2)(a)(i). Tax Department Alert** - Source to the lessee's county of residence or business location. If the lessee is a nonresident, source to the location where the boat is docked. If the lessee is a nonresident, and the boat or motor will be take immediately out-of-state, see R.C. 5739.027.
Airplanes (that are not Transportation Equipment***) Greater than 30 days The airplane's primary location when the lease is executed. R.C. 5739.033(I)(2)(a)(i). Tax Department Alert** - for vendors with a fixed location where goods are shown to customers for selection, source to the vendor's location. For all other vendors, source to the location where possession of the airplane is transferred.
TPP (not motor vehicles) Used Primarily For BUSINESS Greater than 30 days Source to the location where the consumer receives the property. R.C. 5739.033(I)(2)(b)(ii). Tax Department Alert** - for vendors with a fixed location where goods are shown to customers for selection, source to the vendor's location. For all other vendors, source to the location where possession of the TPP is transferred. If you're a non-Ohio seller (but not motor vehciles or watercraft dealers), source to the location where the TPP is delivered or, if not delivered, to the place where the lessee will make first use of the property in OH.

* "Executed" means the earlier of when the property is delivered or first payment made. Tax on charges that cannot be determined at the time the lease is executed (excess mileage or wear and tear) is due when the charges are billed.

** The "Tax Department Alert" referenced is "Leases: Change in the Tax Law, Revised March 2006."

*** "Transportation Equipment" means trucks heavier than 10,000 lbs (5 tons), aircraft operated by air carriers authorized to carry property and passengers, locomotives and railcars, and containers for any of the above (and parts).

Leases - Tax Due As Payments Are Made

Property Lease Term Sourcing
Motor Vehicles (Carrying load greater than 1 ton - that are not Transportation Equipment***) Any length Source to the property's primary location during the installment term. R.C. 5739.033(I)(2)(a)(ii).
Boats & Outboard Motors 30 days or fewer Source to the property's primary location during the installment term. R.C. 5739.033(I)(2)(a)(ii).
Airplanes (that are not Transporation Equipment***) 30 days or fewer Source to the property's primary location during the installment term. R.C. 5739.033(I)(2)(a)(ii).
TPP (not motor vehicles) Used Primarily For BUSINESS 30 days or fewer Source to the location where the consumer receives the property. R.C. 5739.033(I)(2)(b)(ii).
TPP (not motor vehicles) Used Primarily For PERSONAL Use Any length Source to the location where the consumer receives the property. R.C. 5739.033(I)(2)(b)(ii).
Transportation Equipment *** Any length Source to the location where the consumer receives the property. R.C. 5739.033(H)(2).

About the Author: Steve’s Ohio tax experience began in 2006 at the Ohio General Assembly where he drafted the State’s tax legislation. Steve quickly became a expert on Ohio’s manufacturing, restaurant, oil and gas, R&D, and other sales tax exemptions and on the taxability of data processing, cloud computing, employment, and other services. In 2011, Steve joined Big 4 firm pwc and gained experience on a national level. Steve also worked for a global software development company where he was responsible for sales, use and other tax compliance.

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